Answering a zillion questions

The first question you have to answer when opening an account is whether it will be a retirement account or a non-retirement account. If you want a retirement account, you need to specify what kind (IRA? Roth IRA? SEP?). I cover the ins and outs of retirement accounts — and how ETFs can fit snugly into the picture — in Chapter 24. A non-retirement account is a simpler animal. You don’t need to know any special tax rules, and your money isn’t committed for any time period unless you happen to stick something like a CD into the account.

The next question you have to answer is whether you want to open a margin account or a cash account. A margin account is somewhat similar to a checking account with overdraft protection. It means that you can borrow from the account or make purchases of securities (such as ETFs, but generally not mutual funds) without actually having any cash to pay for them on the spot. Cool, huh?

Unless you have a gambling addiction, go with margin. You never know when you may need a quick (and, compared to credit cards, inexpensive) and potentially tax-deductible loan. If you think you may have a gambling addiction, however, read the sidebar, “Don’t margin your house away!”

You’re also asked questions about beneficiaries and titling (or registration), such as whether you want your joint account set up with rights of survivorship. I’ll just say one quick word about naming your beneficiaries: Be certain that who you name is who you want to receive your money when you die.

Beneficiary designations supersede your will. In other words, if your will says that all your ETFs go to your sister, and your beneficiary designation on your account names someone else, your sister loses; all the ETFs in your account will go to that other person.

Finally, you’re asked all kinds of personal questions about your employment, your wealth, and your risk tolerance. Don’t sweat them! Federal securities regulations require brokerage houses to know something about their clients. Honestly, I don’t think anyone ever looks at the personal section of the forms. I’ve never heard any representative of any brokerage house so much as whisper any of the information included in those personal questions.

Placing an order to buy

After your account is in place, which should take only a few days, you’re ready to buy your first ETF. Most brokerage houses give you a choice: Call in your order, or do it yourself online. Calling is typically much more expensive because it requires the direct assistance of an actual person. Being the savvy investor that you are, you’re not going to throw money away, so place all your orders online! If you need help, a representative of the brokerage house will walk you through the process step-by-step — for free!

Keep in mind when trading ETFs that the trading fees charged by the brokerage house may nibble seriously into your holdings (although usually not all that much). Even if you work with a brokerage house that charges nothing for trading ETFs, there will still be a small cost called the spread that you don’t readily see. The spread is where you may lose a penny or two or three to middlemen working behind the scenes of each trade. Spreads can nibble at your portfolio just as the more visible fees do. Here’s how to avoid getting nibbled:

• Don’t trade often. Buy and hold, more or less (see Chapter 22). Yes, I know that headlines from time to time declare that “buy and hold is dead.” That’s nonsense. Don’t believe it. “Buy and hold,” by the way, doesn’t mean you never trade. But if you’re making more than a few trades every few months, that’s too much.
• Know your percentages. In general, don’t bother with ETFs if the trade is going to cost you anything more than one-half of one percent. In other words, if making the trade is going to cost you $5, you want to invest at least $1,000 at a pop. If you have only $900 to invest, or less, you are often better off purchasing a no-load mutual fund, preferably an index fund, or waiting until you’ve accumulated enough cash to make a larger investment. Alternatively, you might choose a no-commission ETF, even if it’s slightly less attractive than the ETF you’d have to pay a commission for. You may swap for the better alternative down the road, especially if you are funding a retirement account where swapping will have no tax consequences.
• Be a savvy shopper. Keep the cost of your individual trades to a minimum by shopping brokerage houses for the lowest fees, placing all your orders online, and arguing for the best deals. Yes, you can often negotiate with these people for better deals, especially if you have substantial bucks. Also know that many brokerage houses offer special incentives for new clients: Move more than $100,000 in assets and get your first 50 trades for free, or that sort of thing. Always ask.

But wait just a moment!

Please don’t be so enthralled by anything you read in this book that you rush out, open a brokerage account, and sell your existing mutual funds or stocks and bonds to buy ETFs. Rash investment decisions almost always wind up being mistakes. Remember that whenever you sell a security, you may face serious tax consequences. (Vanguard offers a unique advantage here; see the sidebar, “The Vanguard edge,” later in this chapter.) If you decide to sell certain mutual funds, annuities, or life insurance policies, there may also be nasty surrender charges. If you’re unsure whether selling your present holdings would make for a financial hit on the chin, talk to your accountant or financial planner.

Trading ETFs like a pro

If you’re familiar with trading stocks, you already know how to trade ETFs. If you aren’t, don’t sweat it. Although there are all kinds of fancy trades you could make, and I’ll touch on a few later, I’m going to ask you now to familiarize yourself with only the two most basic kinds of trades: market orders and limit orders.

A market order to buy tells the broker that you want to buy. Period. After the order is placed, you will have bought your ETF shares…at whatever price someone out there was willing to sell you those shares for.

A limit order to buy asks you to name a price above which you walk away and go home. No purchase will be made. (A limit order to sell asks you to name a price below which you will not sell. No sale will be made.)

Market orders are fairly easy. You should be just fine as long as you are buying a domestic ETF that isn’t too exotic (the kind of ETFs I’ll be recommending throughout this book); as long as you aren’t trading when the market is going crazy; or as long as you aren’t trading right when the market opens or closes (9:30 a.m. and 4:00 p.m., Manhattan time weekdays).

A limit order may be a better option if you are placing a purchase for an ETF where the “bid” and the “ask” price may differ by more than a few pennies (indicating the middlemen are out to get you), or where there may be more than a negligible difference between the market price of the ETF and the net asset value of the securities it is holding. This would include ETFs that trade not that many shares — especially on a day when the market seems jumpy. The risk with limit orders is that you may not get your price, and so the order may not go through.

To execute a limit order without risk that you’ll miss out on your purchase, place the order slightly above the last sale. If your ETF’s last sale was for $10 a share, you may offer $10.03. If you’re buying 100 shares, you may have just blown a whole three dollars, but you’ll have your purchase in hand.

What to look for

Here’s what you want from any broker who is going to be holding your ETFs:

• Reasonable fees
• Good service, meaning they answer the phone without putting you through answering-system hell
• A user-friendly website
• Good advice, if you think you’re going to need advice — reps that don’t stand to earn a commission for steering you into high-priced products
• A service center near you, if you like doing business with real people
• Financial strength

Financial strength really isn’t as important as the others because all brokerage houses carry insurance. Still, a brokerage house that collapses under you can be a problem, and it may take time to recoup your money. See the sidebar, “Can you lose your ETFs if your brokerage house collapses?”

I give you my take on some of the major brokerage houses in just a moment, but I first want to talk a bit about fees, which can be downright devilish to compare and contrast.

Price is no longer key

Shopping for shoes? Beer? Pickled herring? Go to one store. Go to another. Or open up an issue of Consumer Reports. Compare the prices. Easy business.

Comparing the prices at brokerage houses was once very difficult, with trading commissions varying depending on how much money you had in your portfolio. Fortunately, those days are almost over. The majority of brokerage houses — including every one of the largest — have, over just the past year or two, killed all trading commissions. (Don’t worry, they make their money elsewhere!)

So whereas trading costs were once all-important in choosing a brokerage house, that’s no longer the case, although you do need to concern yourself with other, ancillary fees. And then there are several nonmonetary considerations to take into account, which I address on the following pages. The following section may be of help in choosing where to house your ETFs. I’ll start with the biggest of the brokers: Vanguard, Fidelity, Charles Schwab, E*Trade, and TD Ameritrade.

Turn to Appendix A for websites and phone numbers of the financial supermarkets listed next.

The Vanguard Group

I mention Vanguard frequently in this book for a number of reasons. For one, I like Vanguard because of its leadership role in the world of index investing. Vanguard is also both an investment house that serves as a custodian of ETFs and a major provider (second in the nation after BlackRock) of ETFs.

Like nearly all of the financial supermarkets, Vanguard allows you to buy and sell most ETFs with no commission. Previously, you could buy only Vanguard ETFs commission-free, but that has recently changed. Now all ETFs held at Vanguard can be purchased and sold without a fee.

But that’s become pretty standard these days. What really shines about Vanguard is, well, a few things…first, its broad array of top-rated index mutual funds. I know, I know, this is a book about ETFs. But index mutual funds and ETFs are close cousins, and sometimes it makes sense to have both in a portfolio. (More on that subject in Chapter 25.)

If you do want to hold Vanguard index mutual funds alongside your ETFs, Vanguard is an awfully logical place to hold them because you can buy and sell Vanguard mutual funds at no charge, provided you don’t do it often. And if you should ever want to switch from a mutual fund to an ETF, it’s easy at Vanguard. (See the sidebar, “The Vanguard edge,” later in this chapter.)

I also like the very structure of the company. Vanguard is owned “mutually” by its shareholders, unlike, say, Fidelity, which is privately owned, or just about all the other brokerage houses, which are publicly owned. The mutual ownership means that investors are shareholders in the company, and that means the Vanguard elite, although certainly well paid, have an obligation to serve your best interests. That gives me trust in the company.

Vanguard reps, by the way, do not ever work on commission. Yes, if you ask for advice, they may try to steer you toward Vanguard products, but not because they’ll be taking a cut. Salespeople masquerading as “advisors” or “brokers” are rampant in the finance business. At Vanguard, you needn’t worry about that.

Fidelity Investments

Fidelity is a giant in the field, a very competitive giant. Like Vanguard, Fidelity also has some excellent low-cost index mutual funds — as well as a handful of NO-cost index mutual funds — of its own, which you may want to keep alongside your ETF portfolio. Unlike some other brokerages, Fidelity mutual funds have no minimums. (ETFs never have minimums, unless you consider one share a minimum.)

The Fidelity website has some really good tools — some of the best available — for analyzing your portfolio and researching new investments. Fidelity’s reps are very knowledgeable and helpful, although post-COVID-19 phone wait times have been disappointingly long. But that problem, alas, affects the whole industry.

Charles Schwab

“Invest with Chuck” Schwab was the nation’s first discount broker, and they offer a lineup of sensible ETFs of their own creation, which trade free — along with other ETFs (since October 2019) — when you open an account with this brokerage house.

Whenever I’ve had occasion to do business with “Chuck’s” staff, I found them friendly and knowledgeable. I just wish I could forgive Chuck for investing — and losing — so much of its clients’ money in the mortgage crisis of 2008, and then admitting no wrong and making no restitution until being strong-armed by the court. (For those familiar with the case, I’m referring to Schwab’s YieldPlus Fund debacle.)

In 2019, Charles Schwab acquired the brokerage house TD Ameritrade, and the scuttlebutt is that in 2023, all TD accounts will be integrated into Schwab.

E*Trade

As the name implies, E*Trade was born in the digital age, and has since become a major player, known especially for its easy-to-use mobile apps and on-the-fly trading tools, colorful graphics, and orientation toward younger investors. (Go to their website, click New to Online Investing, and view the introduction from Alex, a handsome 30-something gentleman with five days’ growth on this face, wearing an open, denim shirt. You’ll see that this is not your grandfather’s brokerage house.)

As with the other biggies, commissions on ETFs have been obliterated.

In 2020, E*Trade was purchased by Morgan Stanley, so it is possible that E*Trade may be changing its name in time.

Other brokerage houses

The houses I discuss in the previous sections aren’t the only players in town. Here are a few more to consider.

• Interactive Brokers (www.interactivebrokers.com): A very popular firm among international and institutional and serious active traders, Interactive Brokers is also open to smaller, buy-and-hold investors. ETF trading is commission-free, but be aware that small accounts may be subject to maintenance fees. If you’re planning to retire abroad, especially to Europe, this firm is worth considering.
• T. Rowe Price (www.troweprice.com/): This Baltimore-based shop has several claims to fame, including its bend-over-backward friendliness to small investors and its plethora of really fine financial tools, especially for retirement planning, that are available to all customers at no cost. The service at this firm is excellent (reps tend to be very chummy). Trading ETFs? No commissions.
• TIAA (www.tiaa.org): This is a good company, but I can’t work with them directly because I’m not a teacher. This brokerage house works only with people who have chalk under their fingernails. (If you’re married to such a person, you qualify, too.) There are some ETFs that trade with no commissions, and others that do.
• Ally (www.ally.com): Primarily an online savings bank, Ally is also where you can house an ETF portfolio, as you can at many savings banks. But, as with many savings banks, not all the ETFs trade commission-free, and even those that do are subject to short-term trading costs. Ally has good rates on savings accounts and CDs, and if you have a chunk of your portfolio in these safe (but low-yielding) investments, and you want an ETF portfolio housed under the same roof, consider Ally.

It’s okay to mix and match — with caution

I want to emphasize that while picking a single brokerage house to manage your accounts makes enormous sense, there is no reason that you can’t own ETFs from different sources. Like your favorite professional sports team or clothing store, each supplier of ETFs has its own personality. A portfolio with a combination of BlackRock, Vanguard, and State Street ETFs can work just fine. In fact, I would recommend not wedding yourself to a single ETF supplier but being flexible and picking the best ETFs to meet your needs in each area of your portfolio.

Note that brokerage houses typically do not sell every available mutual fund. But I’ve never heard of a brokerage house limiting which ETFs it will sell.

When mixing and matching ETFs, I would just caution that you don’t want holes in your portfolio, and you don’t want overlap. Mixing and matching, say, a total U.S. stock fund from one ETF provider with a European stock fund of another provider would be just fine because there’s virtually no chance for either overlap or gaps. However, I would recommend that in putting together, say, a U.S. value and a U.S. growth fund, or a U.S. large-cap and a U.S. small-cap fund, in the hopes of building a well-rounded portfolio, you may want to choose ETFs from the same ETF provider, using the same index providers (Russell, Morningstar, S&P, and so on). That’s because each indexer uses slightly (and sometimes not so slightly) different definitions of “value,” “growth, “large,” and “small.” So mixing and matching funds from different providers may be less than ideal.

There’s much more on mixing in matching in Part 5, “Putting It All Together.”

One last preliminary note before I introduce the players: You’ll recall that when I introduced you to the brokerage houses, I said that price is no longer key. That’s because most brokerage houses have reduced their trading commissions to zero, and where there is a charge to trade an ETF, it is almost always miniscule. In choosing ETF providers — and more importantly, individual ETFs — price is key. Every dollar you pay a fund provider in fees is probably, in the long run, one less dollar you’re going to earn.

Table 3-1 offers a handy reference to the largest ETF providers, which I introduce you to in a moment. Note that I list the companies in order of the total assets each has in all its ETFs.

Check your passport

A quick word for you readers who live outside of the United States: All ETFs (and mutual funds) sold in the United States must be approved by the U.S. Securities and Exchange Commission. Other countries have their equivalent governmental regulatory authorities. None of the ETFs listed in this section or in Part 2 of this book are sold beyond the borders of the United States. Some of the ETF providers mentioned — particularly BlackRock and Vanguard — do sell ETFs in other countries, but not the same ETFs.

BlackRock Financial Management iShares

With 338 ETFs for sale and $2.24 trillion in ETF assets (about a third of the U.S. ETF market), iShares is the undisputed market leader. The firm behind iShares, BlackRock, Inc., merged in 2009 with Barclays Global Investors, the mega-corporation that is now one of the largest investment banks in the world ($8.7+ trillion in assets under management). Through its iShares, BlackRock offers by far the broadest selection of any ETF provider. You can buy iShares that track the major S&P indexes for growth and value, large-cap and small-cap stocks. Other iShares equity ETFs track the major Russell and Morningstar indexes. You can also find industry-sector iShares ETFs from technology and healthcare to financial services and software.

In the international arena, you can buy an iShares ETF to track either an intercontinental index, such as the MSCI EAFE (Europe, Australia, and the Far East), or much narrower markets, such as the Malaysian or Brazilian stock markets. iShares also offer a broad array of fixed-income (bond) ETFs, including 18 ETFs for U.S. government bonds alone, 15 for tax-free municipals, and others for corporate bonds and mortgage-backed securities of many different maturities and credit ratings.

Management fees vary from a low of 0.03 percent for its short-term Treasury Bond fund (SGOV) and its plain-vanilla S&P 500 stock fund (IVV). Most of the offerings cost in the range of 0.05 to 0.30 percent. Only the niche, more exotic offerings are what I would call really expensive. The BlackRock Future Tech ETF (BTEK) carries an expense ratio of 0.88, and the iShares India 50 ETF (INDY) costs an eyebrow-raising 0.93 percent.

The single-country ETFs tend to run in the 0.60 ballpark, but BlackRock may be forced to cut that cost or lose market share to Franklin Templeton, which launched a very similar lineup of individual-country ETFs for a fraction of the price.

Russell’s review: Generally, you won’t go too wrong with BlackRock/iShares. The firm has done an outstanding job of tracking indexes and offering variety. It also has done a good job of maintaining tax efficiency. I caution you, however, not to get sucked into the iShares candy store. Some of the ETFs track very small markets and market segments and clearly don’t belong in most people’s portfolios. I suggest that you think twice, for example, before making the iShares MSCI Peru ETF (EPU) a major part of your portfolio. It’s expensive at 0.59 percent a year, and the market capitalization of the entire Lima Stock Exchange — including every publicly owned corporation issuing stock — is about $97 billion. That may sound like a good sum, but it is less than half the size of PepsiCo, Inc., America’s thirty-fifth largest company! For more information, visit www.ishares.com.

Vanguard ETFs

It goes without saying that these people know something about index investing. In 1976, Vanguard launched the first index-based mutual fund for the retail investor, the Vanguard Index Trust 500 Portfolio. (Wells Fargo already had an index fund, but it was available only to endowments and other institutions.) In 2001, Vanguard launched its first ETF. Why Vanguard wasn’t exactly in the ETF vanguard is anyone’s guess, but by the time Vanguard ETFs were introduced to the market, iShares (then under Barclays) had already taken a solid lead. But Vanguard ETFs are quickly moving up. As of this writing, 80 Vanguard ETFs hold $1.76 trillion in assets, making Vanguard the second-largest ETF provider.

Vanguard is the fastest-growing ETF provider due to its sensible methodologies and its low costs. How low is low cost? The lowest-cost Vanguard ETFs — the Vanguard S&P 500 ETF (VOO) and the Vanguard Total Stock Market ETF (VTI) — will set you back 0.03 percent in total management expenses per year. (That’s 30 cents per $1,000 invested.) Even the most expensive of Vanguard’s offerings, the Vanguard International High Dividend Yield Index Fund (VYMI), costs only 0.27 percent — not at all outrageous.

Russell’s review: I love Vanguard’s low costs. Who wouldn’t? Vanguard’s lineup of ETFs, in line with Vanguard’s corporate personality, is sensible and direct. In fact, Vanguard is perhaps the only major supplier of ETFs that offers nothing I would consider wacky or inappropriate for most investors’ portfolios. In other words, Vanguard doesn’t market something simply because it will sell. The company uses reasonable indexes, tracks them well, and takes the utmost care to avoid capital gains taxes and make certain that all dividends paid are “qualified” dividends subject to a lower tax rate. For more information, visit https://investor.vanguard.com/home.

State Street Global Adviser’s SPDRs

State Street’s flagship ETF, the first ETF on the U.S. market, is the SPDR S&P 500 (SPY). It boasts more than $364 billion in net assets, considerably larger than any other ETF on the market. State Street Global Adviser’s (SSgA) pet spider gives it a firm perch as the third-largest provider of ETFs, having recently fallen well behind number-two Vanguard. State Street’s initial ETFs tended to follow more traditional indexes but have since branched out into some awfully niche areas. The more basic ETFs (the ones I prefer) carry reasonable fees, and are varied enough to allow for a very well-diversified portfolio. All told, SSgA’s 130 U.S.-based ETFs hold about $900 billion in assets.

Russell’s review: The management expenses — with most of the basic ETFs costing less than 0.20 percent a year — are generally reasonable. The SPDRs offer a very efficient way of investing in various industry sectors (if that’s your thing), both at home and abroad. Some of the newer offerings are, like BlackRock’s, awfully niche and a tad on the pricey side — although not nearly as niche and pricey as the ETF offerings of some of the smaller purveyors.

One drawback to SSgA’s offerings is the legal structure of some of its ETFs. The oldest ETFs, such as SPY, are set up as unit investment trusts rather than open-end funds as most of the newer ETFs are. That means the older funds can’t reinvest dividends on a regular basis, creating a cash drag that can bring down long-term total returns by a smidgen. It’s hard to actually measure the impact, but a recent glance at three S&P 500 ETFs — Vanguard’s VOO, iShares’s IVV, and SPY — show VOO’s and IVV’s one-year returns clocking in at one basis point (1/1,000) higher than SPY’s. Not a huge deal.

For more information, visit www.ssga.com/us/en/individual/etfs.

Invesco

Invesco, formerly Invesco PowerShares, gobbled up ETF provider Guggenheim (which formerly gobbled up Rydex) to become number four in size and number two in number of fund offerings among ETF providers. The ETFs tend to be a bit pricier than those of the Big Three, and the methodologies might often be called innovative or nutty, depending on your point of view. Invesco is perhaps the leader in so-called “smart beta” indexing, where the line between passive and active management can get a wee bit blurry.

That is to say that most of the ETFs do follow indexes, but the indexes themselves are designed to beat the market, where “the market” is defined as classic indexes, such as the S&P 500. These indexes choose securities, generally not based on the market cap company, but on other criteria, such as low volatility, high volatility, momentum, sensitivity to interest rates, growth in revenue, and so on.

Some of the ETFs are based on multiple valuation criteria. That means potential high turnover and some added trading expenses. It also means that if you choose PowerShares ETFs to build your portfolio, you are no longer a true index investor, which (judging by historical data over the long haul) may put you at something of a disadvantage.

The company has been quite creative in its offerings, and allows you to slice and dice your portfolio in 228 ways.

Russell’s review: Nothing about Invesco’s alternative indexes scares me too much. The problem is which alternative indexes are going to beat the classical indexes? You don’t know. And if you choose a whole bunch of the alternative indexes — momentum, low-volatility, high-revenue, and so on — you’ll be buying the whole stock market but paying a boatload more than you would for any whole-stock-market ETF.

I have used one Invesco ETF, despite the relatively high expense ratio of 0.40 percent: the Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS). In the next chapter, I discuss how I diversify a portfolio, which can include the mild overweighting of certain industry sectors, notably Consumer Staples. The problem with most Consumer Staple funds is that they offer only large-cap companies, whereas RHS gives you large, medium, and small. If the expense ratio were lower, I would use this fund more. For more information, visit www.invesco.com/us/en/individual-investor.html.

Table 3-2 shows the average expense ratio (weighted by assets under management) of all the ETFs issued by one purveyor. The six largest ETF providers tend to have relatively low costs, which is one reason why they are the largest. The data is provided by ETF Database.

Charles Schwab

Brokerage giant Charles Schwab came into the ETF game late — 2009 — but immediately caught market share by offering free trading of Schwab ETFs on the Schwab platform (you can now trade all ETFs free) and by offering ETFs with lower expense ratios than anyone else. At present, only Vanguard can match Schwab in terms of economy. And like Vanguard, Schwab has been prudent in its offerings.

Nothing flashy. Nothing off-the-wall. Of Schwab’s 26 ETFs, 20 are plain-vanilla market-weighted offerings, such as the Schwab U.S. Large-Cap ETF (SCHX) with an expense ratio of 0.03 percent, and the Schwab U.S. Aggregate Bond ETF (SCHZ) with an expense ratio of 0.04 percent. Six of the ETFs are based on what Schwab on its website calls “fundamental” indexes… “a complement to traditional market cap index and actively managed strategies, helping to create the potential for more attractive risk-adjusted portfolios.”

The fundamental-index funds have expense ratios of 0.25 percent to 0.39 percent, so it will be hard for these passive-active funds to beat the much cheaper passive-index ETFs over the long haul. Not impossible, but hard.

Russell’s review: I’ve become a recent Schwab convert, switching over my portfolios to sell off the iShares TIPS fund (TIP) — TIPS stands for Treasury Inflation-Protected Securities — and buy the very, very similar Schwab U.S. TIPS ETF (SCHP). The cost is 0.19 percent for the iShares but only 0.04 for the Schwab model. For more information, visit www.schwab.com.

First Trust

First Trust, which is sixth among the largest ETF providers, comes with only half the assets of Schwab (which is in the number-five spot). Like most of the smaller contenders, the management fees are higher. However, if you are looking for active management or truly different, unusual asset classes, First Trust may be the place to turn. Where else will you find such investments as the First Trust Merger Arbitrage ETF (MARB) or the First Trust Hedged BuyWrite Income ETF (FTLB)?

First Trust also offers structured-product ETFs, otherwise known as defined-outcome ETFs, which have just hit the market in the past year or so. I talk more about them in Chapter 18. I’m not a fan.

Russell’s review: Buying a basic portfolio-building-block kind of ETF through First Trust just doesn’t make any sense. The prices are too high. On the other hand, First Trust doesn’t offer much in the way of basic. Most of its ETFs are one-of-a-kind. As with any investment of this ilk, proceed with caution. For more information, visit www.ftportfolios.com.

Other suppliers

At present, there are 200 or so issuers of ETFs in addition to the six I talk about. These include some fairly strong brands that offer a bevy of ETFs at fairly reasonable prices, such as ProShares, WisdomTree, Van Eck Associates, Franklin Templeton, and Mirae Asset Global Investments.

The list includes some financial giants that got into the ETF game late, but with all the muscle they have, they may become major players. Fidelity, JPMorgan Chase, BNY Mellon Bank, Dimensional, New York Life, and TIAA are examples.

Some of the real niche providers are the World Gold Council, ARK, Cambria, Innovator, Amplify Investments, and Sprott. Some are pretty small companies with only a handful of offerings — or one — and some of their novel ideas may pan out. Unfortunately, the small fries too often try to make up for the lack of economies of scale by throwing economy out the window and charging you as much as, or more than, you’d pay for an actively managed mutual fund, greatly diminishing your odds of seeing a healthy return. Many of the small providers will be gone in the years to come. On the other hand, some awfully overpriced and underachieving mutual funds have been around for years.

S&P Dow Jones Indices

Once known as Standard & Poors, and today simply S&P Global, or S&P, the company maintains hundreds of indexes, including the S&P 500 (the one you’re most likely to see flashed across your television screen on the business channel). Trillions in investors’ assets are directly tied to S&P Dow Jones indexes (or indices, if you prefer) — close to all other indexes combined.

More ETFs are based on S&P and Dow indexes than any other, by far. These include many of the offerings of BlackRock, Vanguard, Charles Schwab, State Street Global Investors, Invesco, ProShares, WisdomTree, and Direxion.

For more information, visit www.spglobal.com.

MSCI

With indexes of all kinds — stocks, bonds, hedge funds, U.S. and international securities — MSCI (formerly Morgan Stanley Capital International), although not quite a household name, has been gaining ground as the indexer of choice for many ETF providers.

MSCI indexes are the backbone of many of the iShares global-industry funds and single-country ETFs. MSCI is also a pre-eminent provider of ESG benchmarks. (See Chapter 17.) For more information, visit www.msci.com.

FTSE/Russell

The largest 1,000 U.S. stocks make up the Russell 1000 index, although it remains relatively obscure because the Dow Industrial and the S&P 500 hog the spotlight when it comes to measuring large-cap performance. The next 2,000 largest stocks on the U.S. market are in the Russell 2000. And the Russell 1000 plus the Russell 2000 make up the Russell 3000. Those are Russell’s more popular indexes, but it has plenty of others as well.

Many of the iShares domestic ETFs are based on FTSE/Russell indexes, as are a good number of Vanguard’s U.S. offerings. ProShares and Direxion also use Russell indexes. For more information, visit www.ftserussell.com

CRSP

CRSP (pronounced “crisp”) stands for The Center for Research in Security Prices. For 60 years, CRSP, a baby of the University of Chicago’s Booth School of Business, has been creating indexes used mostly by academics. All that changed in 2012 when Vanguard dumped MSCI for a number of its U.S. indexed funds (both mutual funds and ETFs) and started to use CRSP. The changeover wasn’t so much Vanguard preferring one indexer’s indexes more than the others; the industry scuttlebutt is that the CRSP deal saved Vanguard a lot of money, part of which saving could presumably be passed on to investors. For more information, visit www.crsp.org.

Bloomberg

Lehman Brothers for years was the leading indexer in the world of fixed-income investments. The firm was acquired by Barclays Capital in 2008 (just as Barclays was leaving the ETF business), and thus the long-famous Lehman Brothers Aggregate Bond Index, the closest thing the fixed-income world had to the S&P 500, was changed to the Barclays Capital Aggregate Bond Index. Then in 2016, the index was turned over to Bloomberg, L.P., which renamed it the Bloomberg Barclays Aggregate Bond Index, which in 2021 became the Bloomberg US Aggregate Bond Index. WHEW! This thing has had more incarnations than any character from Bollywood!

Although the Bloomberg Aggregate Bond Index is the firm’s most famous product, there are dozens of other bond indexes, and they are used by BlackRock, Vanguard, and State Street. Just about any company that issues plain-vanilla bond funds uses Bloomberg indexes for their fixed-income ETFs. For more information, visit www.bloomberg.com.

NYSE Arca

Tracing its origins to 1792, the New York Stock Exchange (NYSE) Arca today lists about 8,000 securities, has about 3,000 member companies, and trades billions of shares a day. About 80 percent of all ETFs are listed on the NYSE Arca. Most of the others are listed on the NASDAQ. The website for NYSE Arca is www.nyse.com.

NASDAQ

No bricks and mortar here — the NASDAQ is a uniquely electronic exchange. The acronym NASDAQ, by the way, stands for National Association of Securities Dealers Automatic Quotation. If you go to www.nasdaq.com and click Market Activity and then Funds and ETFs, there’s fun information at your fingertips, such as which ETFs are trading the most and which have seen the most price movement in the past day.

BATS

About 220 ETFs are traded on BATS, an outfit run by Cboe Global Markets, Inc. (Cboe). Once upon a time, Cboe stood for Chicago Board Options Exchange, and even though there are lots of securities that now trade on BATS, the emphasis is still on options. So if you want to learn anything about options (on ETFs or other securities), the website — www.cboe.com — offers a good education.

Commissioned brokers

Most often they call themselves “financial planners,” and some may actually do some financial planning. Many, however, are merely salespeople in poor disguise, marketing pricey and otherwise inferior investment products and living off the “load.” The load — or entrance fee — to buying certain investment products, such as some mutual funds, most annuities, and virtually all life insurance products, can be ridiculously high. Thank goodness they don’t exist in the world of ETFs — yet.

When first introduced, the PowerShares lineup of ETFs was designed to be sold through commissioned brokers at 2 percent a pop. The Securities and Exchange Commission killed the idea. But in time, the commissioned brokers may return to the world of ETFs, with their lobbyists in tow.

Separately managed accounts

Separately managed accounts, or SMAs, have traditionally been aimed at the well-to-do. Instead of buying into mutual funds, the wealthy hire a private manager with Persian rugs in his lobby to do essentially what a mutual fund manager does: pick stocks. But now many SMAs are billing themselves as ETF gurus. Instead of picking stocks, they pick ETFs — at a price.

ETF SMAs that promise to beat the market through exceptional ETF selection or market timing are unlikely to do any better than stock SMAs. You should not hold your breath waiting for these guys to make you rich. Some SMA managers may be very good at what they do, but much of what they do can be learned in this book. If you want to hire someone to manage your ETFs, that’s fine, but if they start talking about skimming 2 percent a year off your assets…heck, you’ll very likely do better on your own (with this book in hand!). Trust me.

Annuities and life insurance products

I’ve seen ads of late from variable annuity companies that feature ETFs in their portfolio. Great! That’s better than high-priced mutual funds. But still, most variable annuities are way overpriced, carry nasty penalties for early withdrawal, and prove to be lousy investments. The same is true for many life insurance products other than simple term life. Investments in ETFs can make these products better, but that’s a relative thing. As a rule, it’s best to keep your investment products apart from your insurance products. And never buy an annuity unless you are absolutely sure you know what you are buying.

Funds of funds

Question the purchase of any mutual fund that features ETFs among its top holdings. Or any ETF that is made up of other ETFs. Ask yourself if there’s a good reason for you to be paying two layers of management fees. There are times when such layering makes sense. Such is the case with many “target date” or “lifecycle” funds, which I discuss in Chapter 21. But in all cases, if those two layers add up to, say, more than half a percentage point, you need to really start to question your purchase.